KINGSTONE COMPANIES, INC. (KINS) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from KINGSTONE COMPANIES, INC.'s 10-K for fiscal year 2021. Filing date: 2022-04-04. Report date: 2021-12-31. Accession: 0001654954-22-004509.

This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.

Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high.

Company profile: KINS · All MD&A years: index · Next year: FY 2022

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We offer property and casualty insurance products to individuals through our wholly owned subsidiary, Kingstone Insurance Company (“KICO”). KICO’s insureds are located primarily in downstate New York, consisting of New York City, Long Island and Westchester County, although we are actively writing business in New Jersey, Rhode Island, Connecticut and Massachusetts. We are licensed in the States of New York, New Jersey, Rhode Island, Connecticut, Massachusetts, Pennsylvania, Maine, and New Hampshire. For the year ended December 31, 2021, 79.5% of KICO’s direct written premiums came from the New York policies.

In addition, through our subsidiary, Cosi Agency, Inc. (“Cosi”), a multi-state licensed general agency, we access alternative distribution channels. Cosi receives commission revenue from KICO for the policies it places with others and pays commissions to these agencies. Cosi retains the profit between the commission revenue received and the commission expense paid (“Net Cosi Revenue”). Commission expense is reduced by Net Cosi Revenue and Cosi-related operating expenses are included in other operating expenses. Cosi-related operating expenses are not included in our stand-alone insurance underwriting business and, accordingly, Cosi’s expenses are not included in the calculation of our combined ratio as described below.

We derive substantially all of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from its portfolio, and net realized gains and losses on investment securities. All of KICO’s insurance policies are written for a one-year term. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the one-year life of the policy). A significant period of time can elapse from the receipt of insurance premiums to the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments. Our holding company earns investment income from its cash holdings and may also generate net realized and unrealized investment gains and losses on future investments.

Our expenses include the insurance underwriting expenses of KICO and other operating expenses. Insurance companies incur a significant amount of their total expenses from losses incurred by policyholders, which are referred to as claims. In settling these claims, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and legal expenses. In addition, insurance companies incur policy acquisition costs. Policy acquisition costs include commissions paid to producers, premium taxes, and other expenses related to the underwriting process, including employees’ compensation and benefits.

Other operating expenses include our corporate expenses as a holding company and operating expenses of Cosi. These corporate expenses include legal and auditing fees, executive employment costs, and other costs directly associated with being a public company. Cosi operating expenses primarily include employment, occupancy and consulting costs.

Principal Revenue and Expense Items

Net premiums earned: Net premiums earned is the earned portion of our written premiums, less that portion of premium that is ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement. Insurance premiums are earned on a pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our insurance policies have a term of one year. Accordingly, for a one-year policy written on July 1, 2021, we would earn half of the premiums in 2021 and the other half in 2022.

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Ceding commission revenue: Commissions on reinsurance premiums ceded to quota share treaties are earned in a manner consistent with the recognition of the direct acquisition costs of the underlying insurance policies, generally on a pro-rata basis over the terms of the policies reinsured.

Net investment income and net gains (losses) on investments: We invest in cash and cash equivalents, short-term investments, fixed-maturity and equity securities, and other investments. Our net investment income includes interest and dividends earned on our invested assets, less investment expenses. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of other-than-temporary impairment. We classify our fixed-maturity securities as either available-for-sale or held-to-maturity. Net unrealized gains (losses) on those securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet while our equity securities and other investments report changes in fair value through earnings. See Note 2 in the accompanying consolidated financial statements for further discussion over our accounting policies following Item 16 of this Annual Report.

Other income: We recognize installment fee income and fees charged to reinstate a policy after it has been cancelled for non-payment.

Loss and loss adjustment expenses incurred: Loss and LAE incurred represent our largest expense item, and for any given reporting period include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and LAE related to estimates of future claim payments based on case-by-case valuations, statistical analyses and actuarial procedures. We seek to establish all reserves at the most likely ultimate liability based on our historical claims experience. It is typical for certain claims to take several years to settle and we revise our estimates as we receive additional information on such claims. Our ability to estimate loss and LAE accurately at the time of pricing our insurance policies is a critical factor affecting our profitability.

Commission expenses and other underwriting expenses: Other underwriting expenses include policy acquisition costs and other expenses related to the underwriting of policies. Policy acquisition costs represent the costs of originating new insurance policies that vary with, and are primarily related to, the production of insurance policies (principally commissions, premium taxes and certain underwriting salaries). Policy acquisition costs are deferred and recognized as expense as the related premiums are earned. Other underwriting expenses represent general and administrative expenses of our insurance business and are comprised of other costs associated with our insurance activities such as regulatory fees, telecommunication and technology costs, occupancy costs, employment costs, and legal and auditing fees.

Other operating expenses: Other operating expenses include the corporate expenses of our holding company, Kingstone Companies, Inc., and operating expenses of Cosi. These expenses include executive employment costs, legal and auditing fees, and other costs directly associated with being a public company. Cosi operating expenses primarily include employment costs, occupancy costs and consulting costs.

Stock-based compensation: Non-cash equity compensation includes the fair value of stock grants issued to our directors, officers and employees, and amortization of stock options issued to the same.

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Depreciation and amortization: Depreciation and amortization includes the amortization of intangibles related to the acquisition of KICO, depreciation of the real estate used in KICO’s operations, as well as depreciation of capital expenditures for information technology projects, office equipment and furniture.

Interest expense: Interest expense represents amounts we incur on our outstanding indebtedness at the applicable interest rates. Interest expense also includes amortization of debt discount and issuance costs.

Income tax expense: We incur federal income tax expense on our consolidated statement of operations as well as state income tax expense for our non-insurance underwriting subsidiaries.

Product Lines

Our product lines include the following:

Personal lines: Our largest line of business is personal lines, consisting of homeowners, dwelling fire, cooperative/condominium, renters, and personal umbrella policies.

Commercial liability: Through July 2019, we offered businessowners policies, which consist primarily of small business retail, service, and office risks, with limited property exposures. We also wrote artisan’s liability policies for small independent contractors with smaller sized workforces. In addition, we wrote special multi-peril policies for larger and more specialized businessowners risks, including those with limited residential exposures. Further, we offered commercial umbrella policies written above our supporting commercial lines policies.

In May 2019, due to the poor performance of this line we placed a moratorium on new commercial lines and new commercial umbrella submissions while we further reviewed this business. In July 2019, due to the continuing poor performance of these lines, we made the decision to no longer underwrite commercial lines or commercial umbrella risks. In-force policies as of July 31, 2019 for these lines were non-renewed at the end of their annual terms. As of December 31, 2021 and 2020, there were no commercial liability policies in-force. As of December 31, 2021, these expired policies represent approximately 20.2% of loss and LAE reserves net of reinsurance recoverables. See discussion below under “Additional Financial Information”.

Livery physical damage: We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included.

Other: We write canine legal liability policies and have a small participation in mandatory state joint underwriting associations.

Key Measures

We utilize the following key measures in analyzing the results of our insurance underwriting business:

Net loss ratio: The net loss ratio is a measure of the underwriting profitability of an insurance company’s business. Expressed as a percentage, this is the ratio of net losses and LAE incurred to net premiums earned.

Net underwriting expense ratio: The net underwriting expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs (the most significant being commissions paid to our producers) and other underwriting expenses less ceding commission revenue less other income to net premiums earned.

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Net combined ratio: The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss and net underwriting expense ratios. If the net combined ratio is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.

Underwriting income: Underwriting income is net pre-tax income attributable to our insurance underwriting business before investment activity. It excludes net investment income, net realized gains from investments, and depreciation and amortization (net premiums earned less expenses included in combined ratio). Underwriting income is a measure of an insurance company’s overall operating profitability before items such as investment income, depreciation and amortization, interest expense and income taxes.

Critical Accounting Policies and Estimates

Our consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes. In preparing these consolidated financial statements, our management has utilized information including our past history, industry standards, and the current economic environment, and other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates in these financial statements may not materialize. Application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of similar companies.

We believe that the most critical accounting policies relate to the reporting of reserves for loss and LAE, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from third party reinsurers, deferred income taxes, the impairment of investment securities, and the valuation of stock-based compensation. See Note 2 to the Consolidated Financial Statements following Item 16 of this Annual Report.

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Consolidated Results of Operations

The following table summarizes the changes in the results of our operations for the periods indicated:

	Years ended December 31,
($ in thousands)	2021			2020			Change		Percent
Revenues
Direct written premiums	$	181,665			$	169,318		$	12,347			7.3	%
Assumed written premiums		-				-			-		na	%
		181,665				169,318			12,347			7.3	%
Ceded written premiums
Ceded to quota share treaties in force during the period		578				33,250			(32,672	)		(98.3	)%
Unearned premiums ceded to new quota share treaty (1)		22,932				-			22,932		na	%
Return of premiums previously ceded to prior quota share treaties (1)		-				(17,440	)		17,440		na	%
Ceded to quota share treaties		23,510				15,810			7,700			48.7	%
Ceded to excess of loss treaties		2,613				2,007			606			30.2	%
Ceded to catastrophe treaties		26,787				24,438			2,349			9.6	%
Total ceded written premiums		52,910				42,255			10,655			25.2	%
Net written premiums		128,755				127,063			1,692			1.3	%
Change in unearned premiums
Direct and assumed		(7,750	)			374			(8,124	)	na	%
Ceded to quota share treaties		22,877				(19,356	)		42,233		na	%
Change in net unearned premiums		15,127				(18,982	)		34,109		na	%
Premiums earned
Direct and assumed		173,915				169,692			4,223			2.5	%
Ceded to reinsurance treaties		(30,033	)			(61,611	)		31,578			51.3	%
Net premiums earned		143,882				108,081			35,801			33.1	%
Ceding commission revenue		90				14,202			(14,112	)		(99.4	)%
Net investment income		6,621				6,506			115			1.8	%
Net gains on investments		9,787				1,591			8,196			515.1	%
Other income		851				990			(139	)		(14.0	)%
Total revenues		161,231				131,370			29,861			22.7	%
Expenses
Loss and loss adjustment expenses
Direct and assumed:
Loss and loss adjustment expenses excluding the effect of catastrophes		87,308				72,842			14,466			19.9	%
Losses from catastrophes (2)		15,632				4,683			10,949			233.8	%
Total direct and assumed loss and loss adjustment expenses		102,940				77,525			25,415			32.8	%
Ceded loss and loss adjustment expenses:
Loss and loss adjustment expenses excluding the effect of catastrophes		155				18,013			(17,858	)		(99.1	)%
Losses from catastrophes (2)		813				1,206			(393	)		(32.6	)%
Total ceded loss and loss adjustment expenses		968				19,219			(18,251	)		(95.0	)%
Net loss and loss adjustment expenses:
Loss and loss adjustment expenses excluding the effect of catastrophes		87,153				54,829			32,324			59.0	%
Losses from catastrophes (2)		14,819				3,477			11,342			326.2	%
Net loss and loss adjustment expenses		101,973				58,306			43,666			74.9	%
Commission expense		33,114				31,828			1,286			4.0	%
Other underwriting expenses		26,254				25,425			829			3.3	%
Other operating expenses		4,183				4,283			(100	)		(2.3	)%
Depreciation and amortization		3,290				2,865			425			14.8	%
Interest expense		1,826				1,826			-		-	%
Total expenses		170,640				124,533			46,106			37.0	%
Loss before taxes		(9,409	)			6,837			(16,246	)		237.6	%
Income tax benefit		(2,031	)			(2,260	)		229			10.1	%
Net (loss) income	$	(7,378	)		$	9,097		$	(16,475	)	na	%

(Columns in the table above may not sum to totals due to rounding)

(1)	Effective December 31, 2020, our personal lines 25% quota share treaty expired on a cut-off basis. Effective December 31, 2021, we entered into a 30% quota share treaty.
(2)	The years ended December 31, 2021 and 2020 include catastrophe losses, which are defined as losses from an event for which a catastrophe bulletin and related serial number has been issued by the Property Claims Services (PCS) unit of the Insurance Services Office (ISO). PCS catastrophe bulletins are issued for events that cause more than $25 million in total insured losses and affect a significant number of policyholders and insurers.

(1)

Effective December 31, 2020, our personal lines 25% quota share treaty expired on a cut-off basis. Effective December 31, 2021, we entered into a 30% quota share treaty.

(2)

The years ended December 31, 2021 and 2020 include catastrophe losses, which are defined as losses from an event for which a catastrophe bulletin and related serial number has been issued by the Property Claims Services (PCS) unit of the Insurance Services Office (ISO). PCS catastrophe bulletins are issued for events that cause more than $25 million in total insured losses and affect a significant number of policyholders and insurers.

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	Years ended December 31,
	2021			2020		Percentage Point Change	Percent Change
Key ratios:
Net loss ratio		70.9	%		61.5	%	9.4	15.3	%
Net underwriting expense ratio		40.6	%		38.9	%	1.7	4.4	%
Net combined ratio		111.5	%		100.4	%	11.1	11.1	%

Direct Written Premiums

Direct written premiums during the year ended December 31, 2021 (“Year Ended 2021”) were $181,665,000 compared to $169,318,000 during the year ended December 31, 2020 (“Year Ended 2020”). The increase of $12,347,000, or 7.3%, was primarily due an increase in premiums from our personal lines business. Direct written premiums from our personal lines business for Year Ended 2021 were $171,720,000, an increase of $9,536,000, or 5.9%, from $162,184,000 in Year Ended 2020. Direct written premiums from our livery physical damage business for Year Ended 2021 were $9,717,000, an increase of $2,661,000, or 37.7%, from $7,056,000 in Year Ended 2020. The increase in livery physical damage direct written premiums was due to the declining effect of the COVID-19 pandemic in our geographic area.

Beginning in 2017 we started writing homeowners policies in New Jersey. Through 2019 we expanded to Rhode Island, Massachusetts and Connecticut. We refer to our New York business as our “Core” business and the business outside of New York as our “Expansion” business. Direct written premiums from our Expansion business were $37,276,000 in Year Ended 2021 compared to $33,914,000 in Year Ended 2020. Direct written premiums from our Core business were $144,385,000 in Year Ended 2021 compared to $135,455,000 in Year Ended 2020.

Net Written Premiums and Net Premiums Earned

Effective December 31, 2021, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”).Effective December 15, 2019, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 15, 2019 through December 30, 2020 (“2019/2020 Treaty”). Effective December 31, 2020, the 2019/2020 Treaty expired on a cut off basis; this treaty was not renewed. In addition to the 2019/2020 Treaty, our personal lines quota share reinsurance treaty in effect for Year Ended 2020 also included the run-off of the personal lines quota share treaty (“2018/2019 Treaty”) that expired on June 30, 2019. The run-off covered the period from July 1, 2019 through June 30, 2020 (“2019/2020 Run-Off”). The following table describes the quota share reinsurance ceding rates in effect during Year Ended 2021 and Year Ended 2020. This table should be referred to in conjunction with the discussions for net written premiums, net premiums earned, ceding commission revenue and net loss and loss adjustment expenses that follow.

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	Years ended December 31,
	2021		2020
Quota share reinsurance rates
Personal lines
2021/2023 Treaty	30% (1	)		n/a
2019/2020 Treaty		n/a		25% (2	)
2018/2019 Treaty		n/a		10% (3	)

	(1)	The 2021/2023 Treaty is effective December 31, 2021 with a quota share reinsurance rate of 30%.
	(2)	The 2019/2020 Treaty was effective from December 15, 2019 through December 30, 2020 with a quota share reinsurance rate of 25%.
	(3)	The 2018/2019 Treaty expired on a run-off basis from July 1, 2019 through June 30, 2020.

Net written premiums increased $1,692,000, or 1.3%, to $128,755,000 in Year Ended 2021 from $127,063,000 in Year Ended 2020. Net written premiums include direct and assumed premiums, less the amount of written premiums ceded under our reinsurance treaties (quota share, excess of loss, and catastrophe). In Year Ended 2021, our premiums ceded under quota share treaties decreased by $32,672,000 in comparison to ceded premiums in Year Ended 2020 (see table above). Our personal lines business was subject to the 2019/2020 Treaty from December 15, 2019 through December 30, 2020. Our personal lines business was subject to the 2018/2019 Treaty through June 30, 2019. Following June 30, 2019, any earned premium and associated claims for policies still in force continued to be ceded under the 10% quota share rate until such policies expired (run-off) over the next year. The 2019/2020 run-off period was from July 1, 2019 through June 30, 2020 and there was no return of unearned premiums under this arrangement.

Excess of loss reinsurance treaties

An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Year Ended 2021, our ceded excess of loss reinsurance premiums increased by $606,000 over the comparable ceded premiums for Year Ended 2020. The increase was due to an increase in subject premiums and increase in rate.

Catastrophe reinsurance treaty

Most of the premiums written under our personal lines policies are also subject to our catastrophe treaties. An increase in our personal lines business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums ceded under catastrophe treaties will increase. This results in an increase in premiums ceded under our catastrophe treaties provided that reinsurance rates are stable or are increasing. In Year Ended 2021, our premiums ceded under catastrophe treaties increased by $2,349,000 over the comparable ceded premiums in Year Ended 2020. The change was due to an increase in reinsurance rates effective July 1, 2020, partially offset by a decrease in our limit effective July 1, 2020. Through June 30, 2020, our ceded catastrophe premiums were paid based on the total direct written premiums subject to the catastrophe reinsurance treaty. Effective July 1, 2020, and continuing through June 30, 2021, our ceded catastrophe premiums were paid based on the total insured value of our risks calculated as of August 31, 2020. Effective July 1, 2021, and continuing through June 30, 2022, our ceded catastrophe premiums will be paid based on the total insured value of our risks as of August 31, 2021.

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Net premiums earned

Net premiums earned increased $35,801,000, or 33.1%, to $143,882,000 in Year Ended 2021 from $108,081,000 in Year Ended 2020. The increase was due to the expiration of both the 2019/2020 Treaty on December 30, 2020 on a cut-off basis and the 2019/2020 Run-Off as of June 30, 2020.

Ceding Commission Revenue

The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods indicated:

	Years ended December 31,
($ in thousands)	2021			2020			Change		Percent
Provisional ceding commissions earned	$	234			$	14,119		$	(13,885	)		(98.3	)%
Contingent ceding commissions earned		(144	)			83			(227	)	n/a	%
Total ceding commission revenue	$	90			$	14,202		$	(14,112	)		(99.4	)%

Ceding commission revenue was $90,000 in Year Ended 2021 compared to $14,202,000 in Year Ended 2020. The decrease of $14,112,000 was due to a decrease in both provisional ceding commissions earned and contingent ceding commissions earned. See below for a discussion of provisional ceding commissions earned and contingent ceding commissions earned.

Provisional Ceding Commissions Earned

Through December 30, 2020, we received a provisional ceding commission based on ceded written premiums. The $13,885,000 decrease in provisional ceding commissions earned was due to the expiration of both the 2019/2020 Treaty on December 30, 2020 on a cut-off basis and the 2019/2020 Run-Off as of June 30, 2020.

Contingent Ceding Commissions Earned

The structure of the 2019/2020 Treaty and 2019/2020 Run-Off called for a fixed provisional ceding commission and there was not an opportunity to earn additional contingent ceding commissions under those treaties. The amount of contingent ceding commissions we are eligible to receive under our prior years’ quota share treaties is subject to change based on losses incurred related to claims with accident dates before July 1, 2017. Under our prior years’ quota share treaties, we received a contingent ceding commission based on a sliding scale in relation to the losses incurred under our quota share treaties. The lower the ceded loss ratio, the more contingent commission we receive.

Net Investment Income

Net investment income was $6,621,000 in Year Ended 2021compared to $6,506,000 in Year Ended 2020, an increase of $115,000, or 1.8%. The average yield on invested assets was 3.25% as of December 31, 2021 compared to 3.39% as of December 31, 2020.

Cash and invested assets were $237,885,000 as of December 31, 2021 compared to $222,314,000 as of December 31, 2020. The $15,571,000 increase in cash and invested assets was primarily attributable to an increase in operating cash flows for the Year Ended 2021.

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Net Gains on Investments

Net gains on investments were $9,787,000 in Year Ended 2021 compared to $1,591,000 in Year Ended 2020. Unrealized gains on our equity securities and other investments in Year Ended 2021 were $2,469,000, compared to $758,000 in Year Ended 2020. Realized gains on sales of investments were $7,317,000 in Year Ended 2021 compared to $832,000 in Year Ended 2020.

Other Income

Other income was $851,000 in Year Ended 2021 compared to $990,000 in Year Ended 2020. The decrease of $139,000, or 14.0%, was primarily due to not having any active commercial lines policies in 2021 to generate fees.

Net Loss and LAE

Net loss and LAE was $101,973,000 in Year Ended 2021 compared to $66,431,000 in Year Ended 2020. The net loss ratio was 70.9% in Year Ended 2021 compared to 61.5% in Year Ended 2020, an increase of 9.4 percentage points.

The following graph summarizes the changes in the components of net loss ratio for the periods indicated, along with the comparable components excluding commercial lines business:

(Percent components may not sum to totals due to rounding)

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The loss ratio during Year Ended 2021 was higher than Year Ended 2020 due to an elevated frequency of liability claims, as well as a higher impact from large fire losses and water damage claims. The elevated reported liability claim frequency began in early 2021 for both Homeowners and Dwelling Fire lines. Liability frequency has improved since June 2021 for Homeowners, our largest line of business. Dwelling Fire Liability frequency was still higher than the historical average in the fourth quarter but has improved compared to the first three quarters of the year. The high liability frequency is suspected to be related to the COVID-19 pandemic and is expected to return to a more typical level as people return to work. The impact of water damage claims during Year Ended 2021 was higher than the prior year, driven by a few large losses that emerged in the fourth quarter.

The impact of catastrophe losses was high for Year Ended 2021. The winter was mild, but there were seven catastrophe events during the second half of 2021, including three named storms, Elsa, Henri and Ida. Ida was one of the largest catastrophe events in the company’s history, resulting in over 1,500 reported claims. The estimated net impact of Ida is $10,300,000, or a 7.1-point impact on the Year Ended 2021 loss ratio. The total impact of all catastrophe events on the loss ratio was 10.3 points for Year Ended 2021. This compares to a 10.7-point impact from catastrophe events for Year Ended 2020, which also had a mild winter but was heavily impacted by Tropical Storm Isaias in the third quarter.

Prior year development was stable during Year Ended 2021. There was an overall favorable development of $15,000, which had a marginal impact on the loss ratio.

See table below under “Additional Financial Information” summarizing net loss ratios by line of business.

Commission Expense

Commission expense was $33,114,000 in Year Ended 2021 or 19.0% of direct earned premiums. Commission expense was $31,828,000 in Year Ended 2020 or 18.8% of direct earned premiums. The increase of $1,286,000 was primarily due to increases in both the annual contingent commissions and direct earned premiums in Year Ended 2021 as compared to Year Ended 2020.

Other Underwriting Expenses

Other underwriting expenses were $26,254,000 in Year Ended 2021 compared to $25,425,000 in Year Ended 2020. The modest increase of $829,000, or 3.3%, was primarily due to an initiative to reduce expenses with the use of technology.

Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $10,189,000 in Year Ended 2021 compared to $10,830,000 in Year Ended 2020. The decrease of $641,000, or 5.9%, compares favorably with the 7.3% increase in direct written premiums. The decrease in employment costs was attributable to staff reductions.

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Our net underwriting expense ratio in Year Ended 2021 was 40.6% compared to 38.9% in Year Ended 2020. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

	Years ended
	December 31,			Percentage
	2021			2020		Point Change
Other underwriting expenses
Employment costs		7.1	%		10.0	%	(2.9	)
Underwriting fees (inspections/surveys)		1.3			2.6		(1.3	)
IT expenses		3.2			2.6		0.6
Profesional fees		1.2			1.0		0.2
Other expenses		5.5			7.4		(1.9	)
Total other underwriting expenses		18.3			23.6		(5.3	)
Commission expense		23.0			29.4		(6.4	)
Ceding commission revenue
Provisional		(0.2	)		(13.1	)	12.9
Contingent		0.1			(0.1	)	0.2
Total ceding commission revenue		(0.1	)		(13.2	)	13.1
Other income		(0.6	)		(0.9	)	0.3
Net underwriting expense ratio		40.6	%		38.9	%	1.7

The overall 13.1 percentage point decrease in the benefit from ceding commissions in Year Ended 2021 was driven by the reduction in provisional ceding commission revenue due to the expiration of the 2019/2020 Treaty on December 30, 2020. The components of our net underwriting expense ratio related to other underwriting expenses and commissions decreased in all categories except for IT expenses and professional fees. The components that decreased, did so due to more retention, given the reduction of ceded premiums after the expiration of the 2019/2020 Treaty on December 30, 2020. IT expenses and professional fees increased in Year Ended 2021 due to our Kingstone 2.0 effort to modernize systems and create a more sophisticated suite of products for our customers.

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Other Operating Expenses

Other operating expenses, related to the expenses of our holding company and Cosi, were $4,183,000 for Year Ended 2021 compared to $4,283,000 for Year Ended 2020. The following table shows a breakdown of the significant components of other operating expenses for the periods indicated:

	Years ended
	December 31,
($ in thousands)	2021		2020			Change		Percent
Other operating expenses
Employement costs	$	795		$	757		$	38		5.0	%
Bonuses		-			15			(15	)	(100.0	)
Equity compensation		1,905			1,770			135		7.6
Professional		348			629			(281	)	(44.7	)
Directors fees		327			365			(38	)	(10.4	)
Insurance		212			240			(28	)	(11.7	)
Other expenses		597			507			89		17.6
Total other operating expenses	$	4,183		$	4,283		$	(100	)	(2.3	)%

(Columns in the table above may not sum to totals due to rounding)

The decrease in Year Ended 2021 of $100,000, or 2.3%, as compared to Year Ended 2020 was primarily due to a decrease in professional fees. This aforementioned decrease was partially offset by an increase in employment costs due to an increase in equity compensation, and compensation paid pursuant to a relinquishment agreement with Dale A. Thatcher, our former Chef Executive Officer (see Note 17 to the consolidated financial statements).

Depreciation and Amortization

Depreciation and amortization was $3,290,000 in Year Ended 2021 compared to $2,865,000 in Year Ended 2020. The increase of $425,000, or 14.8%, in depreciation and amortization was primarily due to depreciation of new system platforms for policy and claims management and newly purchased assets used to upgrade our other systems.

Interest Expense

Interest expense in Year Ended 2021 and Year Ended 2020 was $1,826,000. We incurred interest expense in connection with our $30.0 million issuance of long-term debt in December 2017.

Income Tax Benefit

Income tax benefit in Year Ended 2021 was $2,031,000, which resulted in an effective tax expense rate of 21.6%. Income tax benefit in Year Ended 2020 was $2,260,000, which resulted in an effective tax expense rate of 175.5%. Loss before taxes was $9,409,000 in Year Ended 2021 compared to loss before taxes of $1,288,000 in Year Ended 2020. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, allowing for a five year carryback of 2020 and 2019 NOLs. We elected on our 2020 and 2019 federal income tax returns to carry back the entire annual 2020 NOL of $5,715,000 to tax year 2015 and to carry back the 2019 NOL of $9,737,000 to tax years 2014 and 2015. The corporate tax rate in 2014 and 2015 was 34%, compared to the corporate tax rate of 21% in 2019 and 2020. The $2,029,000 tax benefit of carrying back these NOLs to 2014 and 2015 was recognized in Year Ended 2020.

Net (Loss) Income

Net loss was $7,378,000 in Year Ended 2021 compared to net income of $972,000 in Year Ended 2020. The decrease in net income of $8,350,000 was due to the circumstances described above.

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Additional Financial Information

We operate our business as one segment, property and casualty insurance. Within this segment, we offer a wide array of property and casualty policies to our producers. The following table summarizes gross and net premiums written, net premiums earned, and loss and loss adjustment expenses by major product type, which were determined based primarily on similar economic characteristics and risks of loss.

	Years ended December 31,
	2021			2020
Gross premiums written:
Personal lines	$	171,719,993			$	162,184,437
Livery physical damage		9,716,658				7,055,668
Other(1)		229,383				245,842
Total without commercial lines		181,666,034				169,485,947
Commercial lines (in run-off effective July 2019)(2)		(856	)			(168,043	)
Total gross premiums written	$	181,665,178			$	169,317,904
Net premiums written:
Personal lines(3)	$	118,842,870			$	120,362,688
Livery physical damage		9,716,658				7,055,668
Other(1)		196,812				218,853
Total without commercial lines		128,756,340				127,637,209
Commercial lines (in run-off effective July 2019)(2)		(856	)			(574,688	)
Total net premiums written	$	128,755,484			$	127,062,521
Net premiums earned:
Personal lines(3)	$	135,738,484			$	96,463,184
Livery physical damage		7,909,791				8,706,984
Other(1)		234,300				198,853
Total without commercial lines		143,882,575				105,369,021
Commercial lines (in run-off effective July 2019)(2)		(856	)			2,711,608
Total net premiums earned	$	143,881,719			$	108,080,629
Net loss and loss adjustment expenses(4):
Personal lines	$	92,475,850			$	56,312,702
Livery physical damage		4,235,255				2,641,801
Other(1)		1,368,343				27,425
Unallocated loss adjustment expenses		3,696,380				4,304,095
Total without commercial lines		101,775,828				63,286,023
Commercial lines (in run-off effective July 2019)(2)		196,768				3,145,049
Total net loss and loss adjustment expenses	$	101,972,596			$	66,431,072
Net loss ratio(4):
Personal lines		68.1	%			58.4	%
Livery physical damage		53.5	%			30.3	%
Other(1)		584.0	%			13.8	%
Total without commercial lines		70.7	%			60.1	%
Commercial lines (in run-off effective July 2019)(2)		-22986.9	%			116.0	%
Total		70.9	%			61.5	%

(1)	“Other” includes, among other things, premiums and loss and loss adjustment expenses from our participation in a mandatory state joint underwriting association and loss and loss adjustment expenses from commercial auto.
(2)	In July 2019, we decided that we will no longer underwrite Commercial Liability risks. See discussions above regarding the discontinuation of this line of business.
(3)	See discussions above with regard to “Net Written Premiums and Net Premiums Earned”, as to changes in quota share ceding rates effective December 31, 2021 and 2020, December 15, 2019 and July 1, 2019.
(4)	See discussions above with regard to “Net Loss and LAE”, as to catastrophe losses in the years ended December 31, 2021 and 2020.

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Insurance Underwriting Business on a Standalone Basis

Our insurance underwriting business reported on a standalone basis for the years ended December 31, 2021 and 2020 follows:

	Years ended
	December 31,
	2021			2020
Revenues
Net premiums earned	$	143,881,719			$	108,080,629
Ceding commission revenue		89,681				14,202,353
Net investment income		6,621,392				6,504,983
Net gains on investments		9,627,948				1,549,099
Other income		849,155				970,595
Total revenues		161,069,895				131,307,659
Expenses
Loss and loss adjustment expenses		101,972,596				66,431,072
Commission expense		33,114,103				31,828,174
Other underwriting expenses		26,254,143				25,424,779
Depreciation and amortization		3,150,489				2,732,128
Total expenses		164,491,331				126,416,153
Loss (income) from operations		(3,421,436	)			4,891,506
Income tax (benefit) expense		(877,002	)			200,339
Net (loss) income	$	(2,544,434	)		$	4,691,167
Key Measures:
Net loss ratio		70.9	%			61.5	%
Net underwriting expense ratio		40.6	%			38.9	%
Net combined ratio		111.5	%			100.4	%
Reconciliation of net underwriting expense ratio:
Acquisition costs and other underwriting expenses	$	59,368,246			$	57,252,953
Less: Ceding commission revenue		(89,681	)			(14,202,353	)
Less: Other income		(849,155	)			(970,595	)
Net underwriting expenses	$	58,429,410			$	42,080,005
Net premiums earned	$	143,881,719			$	108,080,629
Net Underwriting Expense Ratio		40.6	%			38.9	%

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An analysis of our direct, assumed and ceded earned premiums, loss and loss adjustment expenses, and loss ratios is shown below:

	Direct					Ceded		Net
Year ended December 31, 2021
Written premiums	$	181,665,178		$	-		$	(52,909,694	)	$	128,755,484
Change in unearned premiums		(7,750,334	)		-			22,876,569			15,126,235
Earned premiums	$	173,914,844		$	-		$	(30,033,125	)	$	143,881,719
Loss and loss adjustment expenses excluding the effect of catastrophes	$	87,308,372		$	-		$	(155,322	)	$	87,153,050
Catastrophe loss		15,632,444			-			(812,898	)		14,819,546
Loss and loss adjustment expenses	$	102,940,816		$	-		$	(968,220	)	$	101,972,596
Loss ratio excluding the effect of catastrophes		50.2	%		0.0	%		0.5	%		60.6	%
Catastrophe loss		9.0	%		0.0	%		2.7	%		10.3	%
Loss ratio		59.2	%		0.0	%		3.2	%		70.9	%
Year ended December 31, 2020
Written premiums	$	169,317,904		$	-		$	(42,255,383	)	$	127,062,521
Change in unearned premiums		373,966			-			(19,355,858	)		(18,981,892	)
Earned premiums	$	169,691,870		$	-		$	(61,611,241	)	$	108,080,629
Loss and loss adjustment expenses excluding the effect of catastrophes	$	72,841,957		$	-		$	(18,012,645	)	$	54,829,312
Catastrophe loss		21,540,120			-			(9,938,360	)		11,601,760
Loss and loss adjustment expenses	$	94,382,077		$	-		$	(27,951,005	)	$	66,431,072
Loss ratio excluding the effect of catastrophes		42.9	%		0.0	%		29.2	%		50.8	%
Catastrophe loss		12.7	%		0.0	%		16.2	%		10.7	%
Loss ratio		55.6	%		0.0	%		45.4	%		61.5	%

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The key measures for our insurance underwriting business for the years ended December 31, 2021 and 2020 are as follows:

	Years ended
	December 31,
	2021			2020
Net premiums earned	$	143,881,719			$	108,080,629
Ceding commission revenue		89,681				14,202,353
Other income		849,155				970,595
Loss and loss adjustment expenses (1)		101,972,596				66,431,072
Acquisition costs and other underwriting expenses:
Commission expense		33,114,103				31,828,174
Other underwriting expenses		26,254,143				25,424,779
Total acquisition costs and other underwriting expenses		59,368,246				57,252,953
Underwriting loss	$	(16,520,287	)		$	(430,448	)
Key Measures:
Net loss ratio excluding the effect of catastrophes		60.6	%			50.8	%
Effect of catastrophe loss on net loss ratio (1)		10.3	%			10.7	%
Net loss ratio		70.9	%			61.5	%
Net underwriting expense ratio excluding the effect of catastrophes		40.6	%			38.9	%
Effect of catastrophe loss on net underwriting expense ratio		0.0	%			0.0	%
Net underwriting expense ratio		40.6	%			38.9	%
Net combined ratio excluding the effect of catastrophes		101.2	%			89.7	%
Effect of catastrophe loss on net combined ratio (1)		10.3	%			10.7	%
Net combined ratio		111.5	%			100.4	%
Reconciliation of net underwriting expense ratio:
Acquisition costs and other underwriting expenses	$	59,368,246			$	57,252,953
Less: Ceding commission revenue		(89,681	)			(14,202,353	)
Less: Other income		(849,155	)			(970,595	)
	$	58,429,410			$	42,080,005
Net earned premium	$	143,881,719			$	108,080,629
Net Underwriting Expense Ratio		40.6	%			38.9	%

Column 1	Column 2
(1)	For the years ended December 31, 2021 and 2020, includes the sum of net catastrophe losses and loss adjustment expenses of $14,819,546 and $11,601,760, respectively.

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Investments

Portfolio Summary

The following table presents a breakdown of the amortized cost, aggregate estimated fair value and unrealized gains and losses by investment type as of December 31, 2021 and 2020:

Available-for-Sale Securities

	December 31, 2021
	Cost or		Gross			Gross Unrealized Losses		Estimated		% of
	Amortized		Unrealized			Less than 12		More than 12		Fair			Estimated
Category	Cost		Gains			Months		Months		Value			Fair Value
Political subdivisions of States, Territories and Possessions	$	17,236,750		$	246,748		$	(197,984	)	$	-			$	17,285,514	10.9	%
Corporate and other bonds Industrial and miscellaneous		80,534,769			2,603,411			(126,926	)		-				83,011,254	52.5	%
Residential mortgage and other asset backed securities (1)		58,036,959			355,985			(489,258	)		(120,344	)			57,783,342	36.6	%
Total fixed-maturity securities	$	155,808,478		$	3,206,144		$	(814,168	)	$	(120,344	)		$	158,080,110	100.0	%

	December 31, 2020
	Cost or		Gross			Gross Unrealized Losses		Estimated		% of
	Amortized		Unrealized			Less than 12		More than 12		Fair			Estimated
Category	Cost		Gains			Months		Months		Value			Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	3,020,710		$	29,190		$	-		$	-			$	3,049,900	1.9	%
Political subdivisions of States, Territories and Possessions		5,287,561			355,541			-			-				5,643,102	3.6	%
Corporate and other bonds Industrial and miscellaneous		108,573,422			11,634,123			(13,216	)		-				120,194,329	76.3	%
Residential mortgage and other asset backed securities (1)		28,163,891			617,368			(7,371	)		(111,947	)			28,661,941	18.2	%
Total fixed-maturity securities	$	145,045,584		$	12,636,222		$	(20,587	)	$	(111,947	)		$	157,549,272	100.0	%

Column 1	Column 2
(1)	As of December 31, 2020, KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York (“FHLBNY”) see Note 9, in the accompanying consolidated financial statements following Item 16 of this Annual Report). As of December 31, 2021 KICO did not have any securities pledged to FHLBNY. The eligible collateral would be pledged to FHLBNY if KICO drew an advance from the FHLBNY credit line. As of December 31, 2020, the estimated fair value of the eligible investments was approximately $11,391,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2020, there was no outstanding balance on the FHLBNY credit line.

Column 1

Column 2

(1)

As of December 31, 2020, KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York (“FHLBNY”) see Note 9, in the accompanying consolidated financial statements following Item 16 of this Annual Report). As of December 31, 2021 KICO did not have any securities pledged to FHLBNY. The eligible collateral would be pledged to FHLBNY if KICO drew an advance from the FHLBNY credit line. As of December 31, 2020, the estimated fair value of the eligible investments was approximately $11,391,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2020, there was no outstanding balance on the FHLBNY credit line.

Equity Securities

The following table presents a breakdown of the cost, estimated fair value, and gross gains and losses of investments in equity securities as of December 31, 2021 and 2020:

	December 31, 2021
								Estimated		% of
			Gross			Gross		Fair		Estimated
Category	Cost		Gains			Losses		Value		Fair Value
Equity Securities:
Preferred stocks	$	22,019,509		$	1,007,009		$	(184,617	)	$	22,841,901	57.6	%
Common stocks and exchange traded mutual funds		15,451,160			1,573,653			(179,712	)		16,845,101	42.4	%
Total	$	37,470,669		$	2,580,662		$	(364,329	)	$	39,687,002	100.0	%

	December 31, 2020
								Estimated		% of
			Gross			Gross		Fair		Estimated
Category	Cost		Gains			Losses		Value		Fair Value
Equity Securities:
Preferred stocks	$	18,097,942		$	853,277		$	(426,942	)	$	18,524,277	53.8	%
Common stocks and exchange traded mutual funds		14,473,224			1,820,512			(404,700	)		15,889,036	46.2	%
Total	$	32,571,166		$	2,673,789		$	(831,642	)	$	34,413,313	100.0	%

Other Investments

Pursuant to the definition of “Fair Value Measurement,” set forth in the Accounting Standards Codification 820 “Fair Value Measurement” (“ASC 820”), an entity is permitted, as a practical expedient, to estimate the fair value of an investment within the scope of ASC 820 using the net asset value (“NAV”) per share (or its equivalent) of the investment. The following table presents a breakdown of the cost, estimated fair value, and gross gain of our other investments as of December 31, 2021 and 2020:

	December 31, 2021		December 31, 2020
			Gross			Estimated			Gross		Estimated
Category	Cost		Gains			Fair Value		Cost	Gains		Fair Value
Other Investments:
Hedge fund	$	3,999,381		$	3,562,034		$	7,561,415	$	1,999,381		$	1,369,245	$	3,368,626
Real estate limited partnership		-			-			-		150,000			-		150,000
Total	$	3,999,381		$	3,562,034		$	7,561,415	$	2,149,381		$	1,369,245	$	3,518,626

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Held-to-Maturity Securities

The following table presents a breakdown of the amortized cost, aggregate estimated fair value and unrealized gains and losses by investment type as of December 31, 2021 and 2020:

	December 31, 2021
	Cost or		Gross			Gross Unrealized Losses		Estimated		% of
	Amortized		Unrealized			Less than 12		More than 12		Fair		Estimated
Category	Cost		Gains			Months		Months		Value		Fair Value
Held-to-Maturity Securities:
U.S. Treasury securities	$	729,642		$	209,633		$	-		$	-		$	939,275	10.7	%
Political subdivisions of States, Territories and Possessions		998,239			22,856			-			-			1,021,095	11.7	%
Exchange traded debt		304,111			85			(13,921	)					290,275	3.3	%
Corporate and other bonds Industrial and miscellaneous		6,234,342			280,951			(12,779	)		-			6,502,514	74.3	%
Total	$	8,266,334		$	513,525		$	(26,700	)	$	-		$	8,753,159	100.0	%

	December 31, 2020
	Cost or		Gross			Gross Unrealized Losses		Estimated	% of
	Amortized		Unrealized			Less than 12		More than 12	Fair		Estimated
Category	Cost		Gains			Months		Months	Value		Fair Value
U.S. Treasury securities	$	729,595		$	319,714		$	-	$	-		$	1,049,309	12.8	%
Political subdivisions of States, Territories and Possessions		998,428			50,917			-		-			1,049,345	12.8	%
Corporate and other bonds Industrial and miscellaneous		5,640,792			455,378			-		-			6,096,170	74.4	%
Total	$	7,368,815		$	826,009		$	-	$	-		$	8,194,824	100.0	%

Held-to-maturity U.S. Treasury securities are held in trust pursuant to various states’ minimum fund requirements.

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A summary of the amortized cost and estimated fair value of our investments in held-to-maturity securities by contractual maturity as of December 31, 2021 and 2020 is shown below:

	December 31, 2021		December 31, 2020
	Amortized		Estimated			Amortized		Estimated
Remaining Time to Maturity	Cost		Fair Value			Cost		Fair Value
Less than one year	$	994,712		$	1,008,180		$	-	$	-
One to five years		1,205,829			1,290,465			2,598,193		2,777,936
Five to ten years		1,513,942			1,648,808			1,502,603		1,727,316
More than 10 years		4,551,851			4,805,706			3,268,019		3,689,572
Total	$	8,266,334		$	8,753,159		$	7,368,815	$	8,194,824

Credit Rating of Fixed-Maturity Securities

The table below summarizes the credit quality of our available-for-sale fixed-maturity securities as of December 31, 2021 and 2020 as rated by Standard and Poor’s (or, if unavailable from Standard and Poor’s, then Moody’s or Fitch):

	December 31, 2021		December 31, 2020
	Estimated		Percentage of		Estimated		Percentage of
	Fair		Estimated		Fair		Estimated
	Value		Fair Value		Value		Fair Value
Rating
U.S. Treasury securities	$	-		0.0	%	$	3,049,900	1.9	%
Corporate and municipal bonds
AAA		1,321,809		0.8	%		1,453,924	0.9	%
AA		11,532,572		7.3	%		3,572,164	2.3	%
A		36,693,911		23.2	%		23,989,619	15.2	%
BBB		47,844,195		30.3	%		95,814,824	60.9	%
Non rated		1,026,001		0.6	%		1,006,901	0.6	%
Total corporate and municipal bonds		98,418,488		62.2	%		125,837,432	79.9	%
Residential mortgage backed securities
AAA		17,350,192		11.0	%		5,467,075	3.5	%
AA		34,241,907		21.7	%		18,865,749	12.0	%
A		4,053,981		2.6	%		2,451,635	1.6	%
BBB		24,254		0.0	%		50,276	0.0	%
CCC		664,628		0.4	%		960,042	0.6	%
CC		125,412		0.1	%		62,029	0.0	%
C		-		0.0	%		15,161	0.0	%
D		55,306		0.0	%		119,144	0.1	%
Non rated		3,145,942		2.0	%		670,829	0.4	%
Total residential mortgage backed securities		59,661,622		37.8	%		28,661,940	18.2	%
Total	$	158,080,110		100.0	%	$	157,549,272	100.0	%

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The table below details the average yield by type of fixed-maturity security as of December 31, 2021 and 2020:

Category
U.S. Treasury securities and obligations of U.S. government corporations and agencies	3.06	%	2.59	%
Political subdivisions of States, Territories and Possessions	2.77	%	3.05	%
Corporate and other bonds Industrial and miscellaneous	3.23	%	3.52	%
Residential mortgage backed securities	2.77	%	1.18	%
Total	2.92	%	3.07	%

The table below lists the weighted average maturity and effective duration in years on our fixed-maturity securities as of December 31, 2021 and 2020:


Weighted average effective maturity	5.7	5.2
Weighted average final maturity	10.2	6.6
Effective duration	4.8	4.7

Fair Value Consideration

As disclosed in Note 4 to the condensed consolidated financial statements, with respect to “Fair Value Measurements,” we define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction involving identical or comparable assets or liabilities between market participants (an “exit price”). The fair value hierarchy distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy prioritizes fair value measurements into three levels based on the nature of the inputs. Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including the reporting entity’s estimates of the assumption that market participants would use, having the lowest priority (“Level 3”). As of December 31, 2021 and December 31, 2020, 62% and 81%, respectively, of the investment portfolio recorded at fair value was priced based upon quoted market prices.

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The table below summarizes the gross unrealized losses of our fixed-maturity securities available-for-sale by length of time the security has continuously been in an unrealized loss position as of December 31, 2021 and 2020:

	December 31, 2021
	Less than 12 months		12 months or more			Total
	Estimated					No. of	Estimated			No. of			Estimated
	Fair		Unrealized			Positions	Fair	Unrealized		Positions			Fair	Unrealized
Category	Value		Losses			Held	Value	Losses		Held			Value	Losses
Fixed-Maturity Securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	-		$	-		-	$	-		$	-		-	$	-	$	-
Political subdivisions of States, Territories and Possessions		6,768,123			(197,984	)	5		-			-		-		6,768,123		(197,984	)
Corporate and other bonds industrial and miscellaneous		17,593,707			(126,926	)	15		-			-		-		17,593,707		(126,926	)
Residential mortgage and other asset backed securities		45,399,451			(489,258	)	26		2,923,182			(120,344	)	2		48,322,633		(609,602	)
Total fixed-maturity securities	$	69,761,281		$	(814,168	)	46	$	2,923,182		$	(120,344	)	2	$	72,684,463	$	(934,512	)

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	December 31, 2020
	Less than 12 months		12 months or more			Total
	Estimated					No. of	Estimated			No. of			Estimated
	Fair		Unrealized			Positions	Fair	Unrealized		Positions			Fair	Unrealized
Category	Value		Losses			Held	Value	Losses		Held			Value	Losses
Fixed-Maturity Securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	-		$	-		-	$	-		$	-		-	$	-	$	-
Political subdivisions of States, Territories and Possessions		-			-		-		-			-		-		-		-
Corporate and other bonds industrial and miscellaneous		1,006,901			(13,216	)	1		-			-		-		1,006,901		(13,216	)
Residential mortgage and other asset backed securities		6,137,522			(7,371	)	5		3,735,732			(111,947	)	10		9,873,254		(119,318	)
Total fixed-maturity securities	$	7,144,423		$	(20,587	)	6	$	3,735,732		$	(111,947	)	10	$	10,880,155	$	(132,534	)

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There were 48 securities at December 31, 2021 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. There were 16 securities at December 31, 2020 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. Significant factors influencing our determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent not to sell these securities and it being not more likely than not that we will be required to sell these investments before anticipated recovery of fair value to our cost basis.

Liquidity and Capital Resources

Cash Flows

The primary sources of cash flow are from our insurance underwriting subsidiary, KICO, and include direct premiums written, ceding commissions from our quota share reinsurers, loss recovery payments from our reinsurers, investment income and proceeds from the sale or maturity of investments. Funds are used by KICO for ceded premium payments to reinsurers, which are paid on a net basis after subtracting losses paid on reinsured claims and reinsurance commissions. KICO also uses funds for loss payments and loss adjustment expenses on our net business, commissions to producers, salaries and other underwriting expenses as well as to purchase investments and fixed assets.

For the year ended December 31, 2021, the primary source of cash flow for our holding company was the dividends received from KICO, subject to statutory restrictions. For the year ended December 31, 2021, KICO paid dividends of $3,500,000 to us.

KICO is a member of the Federal Home Loan Bank of New York (“FHLBNY”), which provides additional access to liquidity. Members have access to a variety of flexible, low cost funding through FHLBNY’s credit products, enabling members to customize advances. Advances are to be fully collateralized; eligible collateral to pledge to FHLBNY includes residential and commercial mortgage backed securities, along with U.S. Treasury and agency securities. KICO currently does not have any securities pledged to FHLBNY; as such, there were no borrowings under this facility during the years ended December 31, 2021 and 2020.

On December 19, 2017, we issued $30 million of our 5.50% Senior Unsecured Notes due December 30, 2022. As of December 31, 2021, invested assets and cash in our holding company was approximately $1,108,000. If the aforementioned sources of cash flow currently available are insufficient to cover our holding company debt service and other cash requirements, we will seek to obtain additional financing.See Notes 2 and 9 to our Consolidated Financial Statements included in this Annual Report for a discussion of our plans in this regard.

Our reconciliation of net income to net cash provided by operations is generally influenced by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing company settlements and loss payments.

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Cash flow and liquidity are categorized into three sources: (1) operating activities; (2) investing activities; and (3) financing activities, which are shown in the following table:

Years ended December 31,	2021
Cash flows provided by (used in):
Operating activities	$	24,346,237		$	(10,234,626	)
Investing activities		(15,947,862	)		581,293
Financing activities		(3,571,519	)		(3,274,410	)
Net increase (decrease) in cash and cash equivalents		4,826,856			(12,927,743	)
Cash and cash equivalents, beginning of period		19,463,742			32,391,485
Cash and cash equivalents, end of period	$	24,290,598		$	19,463,742

Net cash provided by operating activities was $24,346,000 in Year Ended 2021 as compared to $10,235,000 used in operating activities in Year Ended 2020. The $34,581,000 increase in cash flows provided by operating activities in Year Ended 2021 was primarily the result of an increase in cash arising from net fluctuations in assets and liabilities, partially offset by our net loss (adjusted for non-cash items) of $21,618,000. The net fluctuations in assets and liabilities are related to operating activities of KICO as affected by growth or declines in its operations, changes to its personal lines quota share, payments on claims, and other changes, which are described above.

Net cash used in investing activities was $15,948,000 in Year Ended 2021 compared to $581,000 provided by investing activities in Year Ended 2020. The $16,529,000 increase in net cash used in investing activities was the result of a $72,048,000 increase in the acquisition of invested assets, partially offset by a $56,691,000 increase in disposals of invested assets in Year Ended 2021.

Net cash used in financing activities was $3,572,000 in Year Ended 2021 compared to $3,274,000 used in Year Ended 2020. The $298,000 increase in net cash used in financing activities was attributable to a $488,000 increase in purchases of treasury stock offset by a $263,000 reduction in dividends paid in Year Ended 2021 compared to Year Ended 2020.

Reinsurance

The following table provides summary information with respect to each reinsurer that accounted for more than 10% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as of December 31, 2021:

		Amount
		Recoverable
	A.M.	as of
($ in thousands)	Best Rating	December 31, 2021		%
Cavello Bay Reinsurance Ltd	A-	$	5,379		31.4	%
Swiss Reinsurance America Corporation	A+		4,700		27.4	%
Hannover Rueck SE	A+		3,650		21.3	%
			13,729		80.1	%
Others			3,405		19.9	%
Total		$	17,134		100.0	%

Reinsurance recoverable from Cavello Bay Reinsurance Limited is secured pursuant to a collateralized trust agreement. Assets held in the trust are not included in our invested assets and investment income earned on this asset is credited to the reinsurer.

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Effective December 31, 2021, we entered into a quota share reinsurance treaty for our personal lines business, which primarily consisted of homeowners’ and dwelling fire policies, covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”). Effective December 15, 2019, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 15, 2019 through December 30, 2020 (“2019/2020 Treaty”). Effective December 31, 2020, the 2019/2020 Treaty expired on a cut off basis; this treaty was not renewed. In addition to the 2019/2020 Treaty, our personal lines quota share reinsurance treaty in effect for Year Ended 2020 also included the run-off of the personal lines quota share treaty (“2018/2019 Treaty”) that expired on June 30, 2019. The run-off covered the period from July 1, 2019 through June 30, 2020 (“2019/2020 Run-off”).

We entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2021. Effective October 18, 2021, we entered into a stub catastrophe reinsurance treaty covering the period from October 18, 2021 through December 31, 2021. The treaty provides reinsurance coverage for catastrophe losses of $5,000,000 in excess of $5,000,000. Effective January 1, 2022, we entered into an underlying excess of loss reinsurance treaty covering the period from January 1, 2022 through January 1, 2023. The treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the treaty. Material terms for our reinsurance treaties in effect for the treaty years shown below are as follows:

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	Treaty Year
	(2021/2023 Treaty)								(2019/2020 Treaty)
	July 1,			December 31,			July 1,		December 31,		July 1,			December 15,
	2022			2021			2021		2020		2020			2019
	to			to			to		to		to			to
	January 1,			June 30,			December 30,		June 30,		December 30,			June 30,
Line of Business	2023			2022			2021		2021		2020			2020
Personal Lines:
Homeowners, dwelling fire and and canine legal liability
Quota share treaty:
Percent ceded		30	%			30	%		None	(7)		None	(7)			25	%		25	%
Risk retained on intial $1,000,000 of losses (7) (9)	$	700,000			$	700,000		$	1,000,000		$	1,000,000			$	750,000		$	750,000
Losses per occurrence subject to quota share reinsurance coverage	$	1,000,000			$	1,000,000			None	(7)		None	(7)		$	1,000,000		$	1,000,000
Expiration date		January 1, 2023				January 1, 2023			NA	(7)		NA	(7)			December 30, 2020			December 30, 2020
Excess of loss coverage and facultative facility coverage (1) (9) (10)	$	400,000			$	8,400,000		$	8,000,000		$	8,000,000			$	8,000,000		$	9,000,000
		in excess of				in excess of			in excess of			in excess of				in excess of			in excess of
	$	600,000			$	600,000		$	1,000,000		$	1,000,000			$	1,000,000		$	1,000,000
Total reinsurance coverage per occurrence (7) (9) (10)	$	500,000			$	8,500,000		$	8,000,000		$	8,000,000			$	8,250,000		$	9,250,000
Losses per occurrence subject to reinsurance coverage (7) (10)	$	1,000,000			$	9,000,000		$	9,000,000		$	9,000,000			$	9,000,000		$	10,000,000
Expiration date			(10)			June 30, 2022			June 30, 2022			June 30, 2021				June 30, 2021			June 30, 2020
Catastrophe Reinsurance:
Initial loss subject to personal lines quota share treaty		10,000,000				10,000,000			None	(7)		None	(7)			7,500,000			7,500,000
Risk retained per catastrophe occurrence (2) (7) (11)		None	(10)		$	7,400,000		$	10,000,000		$	10,000,000			$	8,125,000		$	5,625,000
Catastrophe loss coverage in excess of quota share coverage (3) (7)		None	(10)		$	490,000,000		$	490,000,000		$	475,000,000			$	475,000,000		$	602,500,000
Catastrophe stub coverage for the period from October 18, 2021 through December 31, 2021 (8)		NA				NA		$	5,000,000			NA				NA			NA
									in excess of
								$	5,000,000
Reinstatement premium protection (4) (5) (6) (10)		Yes				Yes			Yes			Yes				Yes			Yes

	(1)	For personal lines, includes the addition of an automatic facultative facility (“Facultative Facility”) allowing KICO to obtain homeowners single risk coverage up to $10,000,000 in total insured value, which covers direct losses from $3,500,000 to $10,000,000 through June 30, 2020. For the period July 1, 2020 through June 30, 2022, the Facultative Facility covers direct losses from $3,500,000 to $9,000,000.
	(2)	Plus losses in excess of catastrophe coverage. For the period July 1, 2020 through December 30, 2020, there was no reinsurance coverage for the $2,500,000 gap between quota share limit of $7,500,000 and first $10,000,000 layer of catastrophe coverage (see note (7) below).
	(3)	Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Duration of 168 consecutive hours for a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone.
	(4)	For the period July 1, 2019 through June 30, 2020, reinstatement premium protection for $292,500,000 of catastrophe coverage in excess of $7,500,000.

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	(5)	For the period July 1, 2020 through June 30, 2021, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.
	(6)	For the period July 1, 2021 through June 30, 2022, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.
	(7)	The personal lines quota share (homeowners, dwelling fire and canine legal liability) expired on December 30, 2020; reinsurance coverage from December 31, 2020 through December 30, 2021 is only for excess of loss and catastrophe reinsurance.
	(8)	Excludes freeze and freeze related claims.
	(9)	For the period January 1, 2022 through January 1, 2023, underlying excess of loss treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Reduces retention to $500,000 from $700,000 under the 2021/2023 Treaty. Excludes losses from named storms.
	(10)	Excess of loss and catastrophe reinsurance treaties will expire on June 30, 2022; reinsurance coverage in effect from July 1, 2022 through January 1, 2023 is only for personal lines quota share (homeowners, dwelling fire and canine legal liability) and underlying excess of loss reinsurance.
	(11)	For the 2021/2023 Treaty, 4% of the 30% total of losses ceded under this treaty are excluded from a named catastrophe event.

				Treaty Year
	July 1, 2021			July 1, 2020			July 1, 2019
	to			to			to
Line of Business	June 30, 2022			June 30, 2021			June 30, 2020
Personal Lines:
Personal Umbrella
Quota share treaty:
Percent ceded - first $1,000,000 of coverage		90	%			90	%			90	%
Percent ceded - excess of $1,000,000 dollars of coverage		95	%			95	%			100	%
Risk retained	$	300,000			$	300,000			$	100,000
Total reinsurance coverage per occurrence	$	4,700,000			$	4,700,000			$	4,900,000
Losses per occurrence subject to quota share reinsurance coverage	$	5,000,000			$	5,000,000			$	5,000,000
Expiration date	June 30, 2022			June 30, 2021			June 30, 2020
Commercial Lines (1):
General liability commercial policies
Quota share treaty					None			None
Risk retained					$	750,000			$	750,000
Excess of loss coverage above risk retained					$	3,750,000			$	3,750,000
					in excess of			in excess of
					$	750,000			$	750,000
Total reinsurance coverage per occurrence					$	3,750,000			$	3,750,000
Losses per occurrence subject to reinsurance coverage					$	4,500,000			$	4,500,000
Commercial Umbrella
Quota share treaty					None			None

Column 1	Column 2	Column 3
	(1)	Coverage on all commercial lines policies expired in September 2020; reinsurance coverage is based on treaties in effect on the date of loss.

Inflation

Premiums are established before we know the amount of losses and loss adjustment expenses or the extent to which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in establishing our reserves, especially as it relates to medical and hospital rates where historical inflation rates have exceeded the general level of inflation. Inflation in excess of the levels we have assumed could cause loss and loss adjustment expenses to be higher than we anticipated, which would require us to increase reserves and reduce earnings.

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Fluctuations in rates of inflation also influence interest rates, which in turn impact the market value of our investment portfolio and yields on new investments. Operating expenses, including salaries and benefits, generally are impacted by inflation.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, or liquidity that are material to investors.

Outlook

The impacts of COVID-19 and related economic conditions on our results are highly uncertain and outside our control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 are evolving rapidly and in ways that are difficult or impossible to anticipate. The impact of COVID-19 on our results for the year ended December 31, 2021 may not be indicative of its impact on our future results. For additional information on the risks posed by COVID-19, see “The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity” included in Part I, Item 1A— “Risk Factors” in this Annual Report.

Our net premiums earned may be impacted by a number of factors. Net premiums earned are a function of net written premium volume. Net written premiums comprise both renewal business and new business and are recognized as earned premium over the term of the underlying policies. Net written premiums from both renewal and new business are impacted by competitive market conditions as well as general economic conditions. As a result of COVID-19, economic conditions in the United States rapidly deteriorated. The decreased levels of economic activity have negatively impacted, and may continue to negatively impact, premium volumes generated by new business. We began to experience this impact in March 2020 and it became more significant in the second and third quarters of 2020. While we are now seeing a reversal of this impact, it may resume in the future, but the degree of any new impact will depend on the extent and duration of any economic contraction and could be material. We have also made underwriting changes to emphasize profitability over growth and have culled out the type of risks that do not generate an acceptable level of return. This action has led, and may continue to lead, to a slowdown in premium growth, particularly in new business.

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